Understanding Accounts Receivable: Get Paid Faster

You did the work. You sent the invoice. Now you wait. And wait. And sometimes wait some more.

Accounts receivable—the money customers owe you—is one of the biggest cash flow challenges for small businesses. You can be profitable on paper while struggling to pay bills because your cash is stuck with customers who haven’t paid.

This guide shows you how to manage accounts receivable effectively so you get paid faster and keep cash flowing.

What Is Accounts Receivable?

Accounts receivable (AR or A/R) represents money owed to your business for goods or services you’ve already delivered. When you invoice a customer with payment terms (Net 30, for example), that invoice becomes an account receivable until it’s paid.

On your balance sheet, accounts receivable is a current asset—it’s money you expect to collect within a year. But unlike cash, you can’t spend it until customers actually pay.

Why AR Management Matters

Cash Flow Impact

Every dollar in AR is a dollar not in your bank account:

You’ve already incurred costs to deliver
You may have paid employees, bought materials
But the cash hasn’t arrived

Extended AR is essentially an interest-free loan to your customers—funded by you.

The Aging Problem

The longer an invoice sits unpaid, the less likely you’ll collect:

Days Outstanding	Collection Probability
Current (0-30)	98%
31-60 days	90%
61-90 days	80%
91-120 days	65%
120+ days	50% or less

Old receivables become bad debt.

Hidden Costs

Beyond cash flow, poor AR management costs:

Time spent chasing payments
Relationship strain with customers
Interest on credit lines to cover gaps
Write-offs for uncollectible accounts
Stress and distraction

Setting Up for Success

Clear Payment Terms

Before you start work, establish:

Payment timeline: Net 15, Net 30, Due on Receipt Accepted methods: Credit card, ACH, check Late payment consequences: Interest, fees, service suspension Deposit requirements: 50% upfront, milestone payments

Put these in your contracts and proposals. Make sure customers agree before you begin.

Professional Invoicing

Your invoices should be:

Clear: What exactly is the customer paying for? Complete: All necessary details for payment Correct: Right amount, right customer, right terms Timely: Sent immediately upon delivery

Invoice essentials:

Your business name and contact info
Customer name and address
Invoice number (sequential)
Invoice date
Due date
Itemized description of goods/services
Amounts and totals
Payment terms
Payment instructions
Accepted payment methods

Easy Payment Options

Remove friction from paying:

Accept credit cards (yes, the fees are worth it)
Offer ACH/bank transfer
Include payment links in invoices
Consider payment plans for large amounts
Make it as easy as possible

Tracking Accounts Receivable

The AR Aging Report

This is your essential AR management tool. It shows:

Every unpaid invoice
Customer name
Invoice amount
Days outstanding
Aging buckets (current, 30, 60, 90+)

Sample Aging Report:

Customer	Invoice	Amount	Current	1-30	31-60	61-90	90+
ABC Corp	1001	$5,000	$5,000
XYZ Inc	998	$3,200		$3,200
Smith Co	985	$1,800			$1,800
Total		$10,000	$5,000	$3,200	$1,800	$0	$0

Review this weekly at minimum.

Key Metrics

Days Sales Outstanding (DSO): Average number of days to collect payment

DSO = (Average AR / Total Credit Sales) × Number of Days

Lower is better. Industry averages vary, but 30-45 days is typical for B2B.

AR Turnover Ratio: How many times per year you collect your average AR

Turnover = Net Credit Sales / Average AR

Higher is better. Indicates efficient collection.

Collection Effectiveness Index (CEI): How well you’re collecting what’s due

CEI = (Beginning AR + Credit Sales - Ending AR) / (Beginning AR + Credit Sales - Current AR) × 100

Target: Above 80%

The Collection Process

Proactive Communication

Don’t wait for invoices to become overdue:

At invoice: Send clear invoice with all details 1 week before due: Friendly reminder email On due date: Payment due notification Day 1 overdue: First follow-up

Follow-Up Schedule

Day 1 past due:

Email reminder
Assume they forgot or overlooked
Friendly tone

Day 7 past due:

Second email
Attach invoice copy
Ask if there are any issues

Day 14 past due:

Phone call
Speak to the person who can authorize payment
Understand the situation

Day 30 past due:

Formal collection letter
Reference payment terms
Mention potential consequences

Day 45+ past due:

Final notice
Consider suspending future work
Discuss payment plan if needed

Day 60+ past due:

Escalate internally
Consider collection agency
Evaluate write-off

Collection Conversations

When you call about unpaid invoices:

Start friendly: “I’m calling to follow up on invoice #1001”

Ask questions:

Is there a problem with the invoice?
Did you receive it?
Is there an issue with the work?
When can we expect payment?

Get specifics: “Can you confirm payment will be sent by [date]?”

Document everything: Note date, who you spoke with, what was said, commitments made

Follow up on commitments: If they say Friday, call Monday if you don’t have payment

Handling Disputes

Sometimes customers don’t pay because of problems:

Listen: Understand their concern Investigate: Check if their complaint is valid Resolve: Fix legitimate issues quickly Document: Keep records of resolution Collect: Once resolved, collect promptly

Don’t let disputes linger. Address them immediately so payment can proceed.

Preventing AR Problems

Credit Policies

Not every customer deserves credit:

For new customers:

Require payment upfront or COD
Start with small credit limits
Check references for larger accounts
Consider credit checks for significant amounts

For existing customers:

Review payment history before extending more credit
Reduce terms for slow payers
Reward good payers with better terms

Deposit and Progress Billing

Don’t fund your customer’s projects:

Deposits: 25-50% before work begins Progress billing: Bill at milestones throughout Retainers: Monthly payments for ongoing work

This reduces your AR exposure and improves cash flow.

Early Payment Incentives

Encourage faster payment:

2/10 Net 30: 2% discount if paid within 10 days
Small percentage discount for immediate payment
Credit card payment option (you get paid immediately)

The discount cost is often less than the cost of waiting.

Late Payment Consequences

Make late payment unattractive:

Interest charges (1-1.5% per month is common)
Late fees ($25-50 per invoice)
Service suspension
Credit hold for future work

Include these in your terms. Follow through consistently.

When Customers Won’t Pay

Payment Plans

If a customer has a cash flow problem but intends to pay:

Get commitment in writing
Set specific amounts and dates
Monitor compliance
Resume normal terms after completion

Escalation Options

When friendly collection fails:

Collection agency: They take 25-50% but handle the work Small claims court: For amounts under your state’s limit (typically $5,000-$10,000) Attorney letter: Sometimes a lawyer’s letter prompts payment Report to credit bureaus: For larger, documented amounts

Writing Off Bad Debt

When you won’t collect:

Document your collection efforts
Write off the receivable
Record bad debt expense
Potential tax deduction (consult your accountant)
Learn from the experience

AR and Cash Flow Management

Forecasting Based on AR

Use AR data to predict cash:

What’s due this week? Probably coming.
What’s 30 days old? Maybe 90% will come.
What’s 60+ days? Uncertain.

Build collection assumptions into cash flow forecasts.

Financing Options

If AR timing creates cash gaps:

Line of credit: Borrow against expected collections Invoice factoring: Sell invoices at a discount for immediate cash AR financing: Borrow using receivables as collateral

These have costs but can bridge timing gaps.

Profit First Approach

If using Profit First, allocate based on collected cash, not billed revenue:

Revenue counts when the money arrives
Allocate from actual deposits
This naturally accounts for collection delays

Technology and Tools

Invoicing Software

Use software that:

Sends professional invoices
Tracks payment status
Sends automatic reminders
Accepts online payments
Integrates with your accounting

Options: QuickBooks, FreshBooks, Wave, Xero, Square Invoices

Automation

Set up:

Automatic invoice sending
Payment reminder sequences
Overdue notifications
Payment received confirmations

Automation ensures nothing falls through cracks.

Online Payments

Add “Pay Now” buttons to invoices:

Credit card processing
ACH bank transfers
Payment portals

Customers pay faster when it’s easy.

Your AR Action Plan

This Week

Run your AR aging report
Identify everything over 30 days
Follow up on oldest invoices first
Send reminders for upcoming due dates

This Month

Review your payment terms—are they appropriate?
Evaluate your invoicing process—any delays?
Set up automatic reminders if you haven’t
Calculate your DSO

Ongoing

Send invoices immediately upon delivery
Review AR aging weekly
Follow up on day 1 of being overdue
Never let invoices age without action

Struggling with collections? At Profit Path Books, we help small businesses implement AR systems that improve cash flow and reduce the time spent chasing payments. Book a consultation to discuss your situation.